The Immunization Effect of Internal Control System Transparency following a Supplier’s Violation of Buyer Trust

Abstract

ABSTRACT In this study, we show that a supplier’s internal controls (ICs) that lead to either falling short of or to exceeding buyer expectations play an important role in the trust a buyer has in its supplier. In a 12-round repeated trust game, we examine the impact of supplier ICs and the transparency of those ICs to the buyer on buyer trusting behavior across three phases of the buyer-supplier relationship: (1) trust formation, (2) trust violation, and (3) trust repair. We find that, although a supplier’s trust violation reduces buyer trusting behavior, the least amount of damage to trusting behavior occurs for suppliers whose ICs led to supplier actions that fell marginally short of buyer expectations before the violation and when the IC was transparent to the buyer. We refer to this as the IC transparency “immunization effect.” We show that suppliers can benefit from making IC choices known to partners. Data Availability: Contact the authors. JEL Classifications: C91; D91; M41.